1. Field of the Invention
The present invention relates to a method and system for optimizing portfolios of assets and, more particularly, to a method and system for automatically rebalancing portfolios of assets to achieve optimality, whereby all recommended rebalancing trade transactions can be automatically implemented based on a customer's single response to an alert message.
2. Description of the Related Art
In the 1950's Harry Markowitz and others developed modern portfolio theory (MPT). At the foundation of MPT is the well-known concept of the “efficient frontier.” The efficient frontier is described as the optimal combination of feasible risk and return in the market, and is defined by a set of points each representing the maximum possible expected return for a given level of risk, the lowest level of risk given a certain expected return, or a combination thereof. In MPT, an optimal portfolio is achieved if its risk-return characteristics match those of the efficient frontier.
Financial advisory and management system for analyzing and managing financial portfolios are available to individual investors and institutional investors. Using sophisticated computerized mathematical models and algorithms, these systems are configured to assess the current risk-return characteristics of a portfolio, calculate the optimal level of the portfolio based on the market volatility and an investor's risk tolerance level, and determine a series of trading transactions (e.g., buying and selling specific stocks) which would help the imbalanced portfolio reach its optimal level.
An example of such a financial advisory system available to institutional investors is disclosed in U.S. Pat. No. 6,021,397 to Jones et al., incorporated fully herein by reference. The Jones system performs portfolio optimization to determine a set of financial products that maximizes the financial goals of a customer, and alerts the customer when the current portfolio has shifted from its optimal level. An attempt to provide an analogous system to individual investors for the purpose of constructing an optimal portfolio of mutual funds is found in U.S. Pat. No. 5,918,217 to Maggioncalda et. al, incorporated fully herein by reference. The Maggioncalda system provides a customer with the ability to interactively explore how changes in one or more parameters such as risk tolerance, savings level, and/or retirement age affect one or more outcomes such as a probability of achieving a financial goal, or how changes in these parameters may affect short-term risk. The Maggioncalda system determines a combination of financial products that optimizes the customer's portfolio and graphically depicts the recommended optimal allocation of wealth among the available set of financial products.
U.S. Pat. No. 5,644,727 to Atkins describes a different financial management system, which is hereby fully incorporated by reference. The Atkins system allows a customer to manage a plurality of different financial accounts (e.g., mortgage account, loan account), perform financial analyses of the accounts, and invest appropriate assets based on the financial analyses. The customer places each individual transaction order to a master computer, wherein the transaction order is processed.
The above-described systems adequately allow customers to track and analyze their investments and investment scenarios; however, they do not provide any effective means by which the customer can actually implement all of the recommended financial transactions in a timely fashion. Time is of essence when responding to the market volatility. Any advice offered by these systems becomes wasted and if the customer is unable to actually implement the advice in a timely manner. Absent such implementation tools, the customer may forfeit valuable opportunity to maximize his profit and may suffer financial loss at the time of a market change.
In view of these and other problems of conventional financial systems and methods, a technique needs to be developed by which recommended portfolio rebalancing transactions can be almost instantaneously and systematically implemented once a customer communicates a decision to rebalance his portfolio. Further, a technique is needed by which a customer can easily and confidently place a portfolio rebalancing order at any time and place it without having to monitor his portfolio or market changes.